AMR, parent of American Air, wants to cut 13,000 jobs, lower pay for other workers, void airplane leases and cut creditor obligations. Delta (NYSE: DAL) and US Air (NYSE: LCC) want to buy AMR. The buyer could end up with a fabulous deal. AMR’s workers and the firms that lease it aircraft will not.

AMR is not the only U.S. company to declare Chapter 11 recently. Eastman Kodak did as well. But Kodak’s reasons are different. It wants to buy time, financially, to auction off patents, which may or may not be valuable. Kodak may cut few if any workers in the process. AMR, on the other hand, wants to salvage its wreck while leaving behind the parts most damaged.

Several things will happened to AMR in bankruptcy court, or have happened already. A judge probably will elect to destroy one small part of the U.S. economy while he opens the door for the building another part. The destruction is assured; the risk of the rebuilding is small. The court system will pervert what the free markets would have handed AMR and a potential buyer. The buyer, in normal circumstances, would have had to accept AMR’s liabilities with its assets, as well as the future that those liabilities and assets might bring. Such a buyout of AMR would have required brilliant management willing to take a long risk for a possible substantial reward. In bankruptcy, though, a buyer will get easy access to a business from which even mediocre management can profit. Bankruptcy will make AMR a post turnaround company — one of the best targets a buyer can buy.

What a bankruptcy court will not do is force a new AMR owner to compensate the people and suppliers whose losses will make AMR viable. Delta or US Air will make money on AMR, probably instantly. The bankruptcy system does not make the acquirer pay for that profitability through some compensation of those people and companies that made the sacrifices that benefit the acquirer.

The Chapter 11 system has allowed AMR to be what it was not before — a perfectly successful company made perfect by those who will get nothing for the transformation that caused the perfection.

Douglas A. McIntyre

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